Earlier this month a report from Credit Suisse Hong Kong warned that China's risks were about to "touch down." This may be the first sign.

According to Caixin Magazine (via FT), The Yunnan Highway, a project in south-central China, can no longer find financing or pay the principal on its debt- debt which amounts to almost 100 billion yuan in loans from a dozen different Chinese banks.

China started using local government financing platforms to fund infrastructure projects back in 2008. Now it looks like there are about 10 trillion yuan in outstanding loans on the books. The government tried to reign in this spending, but banks didn't cooperate.

Even in March, banks' annual reports were still broadcasting that the non-performing rate for platform lending was below 1 percent. With the banking industry well-capitalized and making adequate provisions, they said, the risks were not worth worrying about. Then, one month later, they were hit with notices of LGFP contract breaches.

In April Yunnan Highway Investment Limited informed its investors, including China Construction Bank, China Development Bank and the Industrial and Commercial Bank of China, that it would not be paying them the principal on their loan, just the interest. Bottom line- they were not collecting enough money from the highway's tolls. Yunnan is an underdeveloped part of Western China, and there simply aren't enough passengers.

And the Yunnan Highway developers know this. In their best case scenario they hoped to make 1 billion yuan with 370 million yuan in operating costs per year. But in the last five years, the highway has only made a total of 800 million yuan in profits.

So the banks are trying to restructure the Yunnan highway's debt, but that won't help the company find financing for the 52 secondary highways that it still wants to build in the province. In 2010, the China Banking Regulatory Commission made a rule- companies actually have to pay back their loans before they take another one. It all sounds like the perfect storm.

The takeaway from all of this? Watch western China. Those provinces depend on the federal government for 60% of their expenditures. In Yunnan, the GDP per capita is $2,320 and its overall GDP ranks 24th in the country. At the same time, there are 20 LGFPs in the province. The federal government wants to develop these regions and has promised to help them continue with infrastructure projects, but can they?